5 Questions About Reserve Fund Studies
The Reserve Study is one of the most important documents that a shared asset community can own. Coengineers, PLLC complies with the more stringent standard of the Canadian Reserve Study Act combined with the ASTM E2018-08 standard for building condition assessments where practical. This standard of care provides the Board, The Management Company, and the community of owners with the highest level of legal and technical resilience in the industry. Don’t sell your community short on reserve fund analysis. No other purchase can pay for itself in multiples as a rock solid reserve study.
Adapted from www.mayflower.ca
Who Is Allowed to Prepare the Reserve Fund Study (Canada)?
The Regulations to the Condominium Act 1998 (Canada) note who is permitted:
- Members of the Appraisal Institute of Canada
- Persons who hold a certificate of practice within the meaning of the Architects Act
- Certified Engineering Technologists
- Architectural Technologists
- Holders of a CRP (RS – USA) designation
- Persons who hold a certificate of authorization within the meaning of the Professional Engineers Act
- Quantity Surveyors
- Graduates Polytechnic University with a Bachelor of Technology new (Architectural Science) Building Science or Architecture option.
Notwithstanding the above, there are regulations on who cannot prepare the Study which include members of the Board, the condominium’s property manager, certain relatives of Board members, an owner or a resident in the-condominium. In addition, the person/company being considered cannot have any direct or indirect interest in a contract or proposed contract with any Board member outside of his/her capacity as a Board member.
Aside from professional credentials, you want someone who has demonstrated experience with condominiums. Notwithstanding the Study being a budget document, it is also a technical report that involves the review of architectural and engineering drawings and the visual inspection of common elements. A trained eye can identify building problems for which repair costs can be included in the Study. In addition, much of the future Reserve Fund expenditures will be due to building envelope (roofing, windows, exterior cladding) and structural restoration (parking garages, balconies). These costs are often very site dependent for which “costing manuals” are of little use. Companies that have designed and administered these types of rehabilitation projects will be better suited to provide budgets for similar future work that the Corporation may be facing.
The regulations to the Condominium Act stipulate the minimum liability insurance requirements; $1,000,000.
What Information Does the HOA Need to Provide?
Once you have hired a consultant, he/she will require information about the condominium corporation. This will include the following:
- As-built drawings and specifications.
- The Declaration and Description.
- Reciprocal cost sharing agreements.
- Previous reserve fund studies.
- The most recent audited financial statements.
- What the current annual contribution to the Reserve Fund is.
- Repairs or replacements to the common elements that have already been completed and when. Similarly, scheduled future work needs to be accounted for.
- A summary of problems being encountered by the Corporation that should be reviewed. As an example, water penetration concerns.
What Is The Process?
The process is as follows:
- The consultant is provided the above information. One of the most important are the drawings. They will be reviewed prior to visiting the site in order for the consultant to become familiar with the overall design and construction schemes.
- Site inspection. In order to have an understanding on the current condition of the common elements, visual inspections are undertaken. Problem areas noted above can be reviewed. After the first study, the next study update can be completed without a site inspection. The next update must include a site inspection.
- The report is then prepared (see next question). The drawings are used to “take-off” quantities such as roofing, exterior wall cladding, asphalt, hallway finishes etc that will assist in preparing the replacement/repair cost budgets. It is recommended that a draft report should be submitted in order for the Board and Property Manager to review it prior to it being finalized. The consultant should be available to attend a meeting to review the report.
- Upon receiving direction from the Board of Directors, the Reserve Fund Study is finalized and submitted.
What Is The Report Format?
Each consultant will have a different format, but in general, the Reserve Fund Study will contain a Physical and Financial Analysis:
- Background Information about the Corporation in general; where it is, its age, a general description of the property as a whole.
- Inspection Report. Based upon the results of the site inspection, the report will provide an itemized overview description of the major common elements. This will include general condition, the need and timing for remedial work or replacement and any other information that the Board should be aware of.
- Information Tables. There is typically a table that summarizes the common elements in terms of current age, life expectancy, remaining service life and current and future cost budgets.
- Expenditure Tables. The data from the Information Tables is summarized to show in a tabular format when the itemized common element repair/replacements are estimated to take place. For each year, these expenditures are summed. The annual projections must be a minimum of 30 years commencing in the year the Study (and updates) is prepared.
- Cash Flow Tables. Based upon the estimated expenditures, different contribution plans can be provided. Often, one plan includes the contribution level currently being used as a form of comparison to other scenarios.
What is the Funding Plan?
As part of the Financial Analysis, the study must in recommended funding plan projected over 30 years from the date of the study. The plan must show:
- The estimated cost of major repairs and replacements based upon current costs.
- The same costs adjusted to account for an assumed inflation rate. The inflation rate must be stated in the study.
- The opening balance of the reserve fund.
- The recommended amount of contributions to the reserve fund determined on a cash flow basis that are required to offset adequately the expected cost in the year of the expected major repair or replacement common elements and assets.
- An estimate of the interest earned on the reserve fund contributions based upon an assumed interest The study shall state the assumed interest rate. The Condominium Act requires that interest generated by the Reserve Fund is reinvested into the Fund.
- The percentage increase in annual contributions to the reserve fund for each year of the 30 year study.
- The estimated closing balance of the reserve fund for each year.